It’s always worth hearing from someone who doesn’t have a “fighting dog”. So when Professor Steve Keene offers an unbiased view of the Scottish Government’s economic plans for independence, lay observers should take note.
Keene is an Australian economist widely known as the economist who most accurately predicted the 2008 financial crisis. He is the former Head of the Department of Economics, Political Science and History at Kingston University and the author of numerous scientific articles and books. Professor Keene has no obvious links with Scotland or discussion of its economic fate.
Seeking an outside perspective, Professor Keane shared with me last week his thoughts on Scotland’s post-independence economic strategy. Steve has extensive knowledge of Scotland’s independence journey and the UK’s current economic downturn. We needed to summarize the key parts of Scotland’s current post-independence vision. Use of the 2022 Paper “A stronger economy through independence” As my touchstone, I asked Steve for his opinion
- continue to use sterling
- Comply with the EU Stability and Growth Pact before joining the EU
- make a voluntary contribution to the UK national debt
Professor Keene’s insights provide a sobering perspective on these strategies.
Use of the pound after independence
Professor Keene’s main concerns about Scotland’s intention to use the pound after independence revolve around the issue of monetary sovereignty.
He asks: “Can Scotland be considered independent while using the pound?”
This highlights the fundamental contradiction of aiming for independence while relying on other countries’ currencies.
“You will lose money…you will run out of pounds…you will have to borrow pounds to continue.”
Professor Keene points out that there is a clear link between the pound and the “enforced austerity and dependence that this strategy may entail”. It focuses on the decision between paying interest on external debt and investing in public services, a decision familiar to countries with external debt.
“Do these proposals have austerity built into them?” I asked.
“I’ve been thinking that Scotland has a trade deficit. Is that so?” he asks.
Scotland has a trade deficit, numbers vary between 10% and 2% of GDP. Professor Keene believes that given our country’s poor balance of payments performance, the trade deficit has a significant impact on how our country manages its independent economy.
He suggested that this dependence on the pound could lead to a “precarious economic situation”. Professor Keene emphasizes the importance of creating Scotland’s own currency to promote economic self-sufficiency and give Scotland the monetary autonomy essential to true independence.
In accordance with the EU Stability and Growth Pact
Mr Keane is a clear critic of Scotland’s plans to mirror the EU’s Stability and Growth Pact. He characterized the decision as “consigning management to a bunch of lunatics” and highlighted the folly of adopting a policy framework when the country is not even a member of the EU.
Professor Keene pointed out the irony in the name of the agreement, which had the opposite effect intended. Instability and stagnation instead of stability and growth.
He cited economists from a variety of schools of thought who have criticized the deal, stressing that such policies could push Scotland into austerity during an economic downturn and exacerbate the financial crisis.
Professor Keene’s advice is clear. Scotland should avoid adopting foreign economic policies that have proven ineffective, and instead develop strategies tailored to its unique economic circumstances.
He stresses that government debt should not be the main concern. Instead, we should focus on building non-financial assets such as infrastructure, education, and healthcare. Mr Keene suggests that Scotland’s obsession with fiscal rules could lead to it neglecting the development of these key sectors, which are vital to long-term economic stability and growth.
offer to repay part of UK debt
Mr Keene reacted skeptically to Scotland’s intention to repay some of the UK’s national debt after independence. You can see our short exchange here.
He questioned the practicality and logic behind the move, likening it to “a classic case of thinking of England and Scotland as two separate households”. Keene argues that this approach fails to understand the complex nature of national debt.
However, I will put this idea on hold for a while. So does Scotland have to borrow pounds to earn pounds or pay back pounds to the institutions that borrowed them? To repay this debt, Scotland has to give money back to those who want to save it. Isn’t the UK national debt simply the amount of British currency created that has not been taxed back? How can something like this be paid off without significantly reducing the UK’s money supply? Or?
Professor Steve Keane’s criticism of the Scottish Government’s post-independence economic plans is a stark warning to the current SNP government.
The path to independence is complex, but there are areas where Scotland can improve its chances of success. I should add that Steve argues that Scotland should have its own currency on the first day of independence after the transition period. It should never follow EU fiscal rules. And finally, the idea of somehow accepting and repaying part of Britain’s debt is as unrealistic as it is reckless.
In summary, Steve’s advice urges a reassessment of strategies that may seem “realistic” but can lead to long-term financial dependence and vulnerability.
Mr Keene’s central insight: Scotland needs to forge its own economic path, securing monetary sovereignty and prioritizing the development of a robust and self-sufficient economy. Independence alone does not create “economic self-determination.” The choices you make in the process make it happen. And the Scottish Government may be getting it wrong.
MSPs can ask Professor Steve Keene questions during the Real World Economics event at Holyrood. Steve will be speaking at a public event in Leith on March 21st.Professor Keene will also be participating. Scotonomics Festival of Economics to be held in Dundee from 22nd to 24th March.